Voluntary Disclosure of Information in a Setting in Which Endowment of Information Has Productive Value

23 Pages Posted: 13 Aug 2006

See all articles by Pascal Frantz

Pascal Frantz

London School of Economics

Norvald Instefjord

University of Essex - Essex Business School

Abstract

This paper introduces a model capturing managers' disclosure policies in settings in which disclosure is rewarded by the financial market because disclosure implies that managers are endowed with information and endowment of information may potentially improve the firm's productive efficiency. It provides sufficient condition for a threshold disclosure equilibrium to obtain and compares disclosure policies in a setting in which endowment of information improves the firm's productive efficiency with disclosure policies in a setting in which endowment of information has no impact on the firm's productive efficiency. Managers' disclosure policies are shown to depend crucially on whether the endowment of information is exogenous or endogenous. When the endowment of information is exogenous, an increase in the usefulness of information in improving the firm's productive efficiency leads to a decrease in the disclosure threshold and hence an increase in the amount of information disclosed. In contrast, when the endowment of information is endogenous, an increase in the usefulness of information in improving the firm's productive efficiency has no effect on the disclosure threshold but leads to a decrease in the probability with which information is acquired and hence a decrease in the amount of information disclosed. As, in the threshold disclosure equilibrium, the net present value of information acquisition arising from any increase in production efficiency is negative, an increase in the usefulness of information in improving the firm's productive efficiency thus reduces the inefficiency caused by information acquisition.

Suggested Citation

Frantz, Pascal and Instefjord, Norvald, Voluntary Disclosure of Information in a Setting in Which Endowment of Information Has Productive Value. Journal of Business Finance & Accounting, Vol. 33, No. 5-6, pp. 793-815, June/July 2006, Available at SSRN: https://ssrn.com/abstract=924038 or http://dx.doi.org/10.1111/j.1468-5957.2006.00604.x

Pascal Frantz (Contact Author)

London School of Economics ( email )

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Norvald Instefjord

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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